There are many examples of how the “democratization of data” has increased efficiencies in diverse markets and industries. Now, we’re seeing a drive to accomplish the same in alternative investments.
Alternatives (typically privately structured investments) play a growing role in the portfolios of European institutional investors as they seek to improve returns and increase diversification while maintaining transparency and good governance.
Effective strategic asset allocation necessitates investing in funds from a number of different providers. But complex investment structures and pooled investment vehicles can inhibit transparency and exposure aggregation.
For heavily regulated investors, European regulators also complicate the landscape by raising capital requirements for fund investments into asset classes which can typically be less than transparent. Regulatory-driven look-through reporting will require many more institutional investors to detail their holdings across the investment portfolio, including alternatives. This, in turn, impacts the operational and reporting demands on those asset managers who manage investments for these institutions.
The good news is that access to this level of granular, look-through detail enables greater insight into the portfolio, and performance attribution. Exploration and visibility of funds of funds exposures along a number of different vectors drive more informed asset allocation choices, particularly in light of complex, macro-economic events like Brexit, for example.
If underlying holdings are exposed through the investment structure, then what-if scenario analyses and portfolio stress testing can be more finely calibrated. Tactical deviation from strategic allocation or identification of discrepancies in fund pricing are better enabled with look through data, among other advantages.
But there are challenges to overcome.
Part of the difficulty in generating the required look-through reporting is the complexity involved in processing the necessary data. Obtaining the relevant information, especially for funds of funds, is time-consuming and challenging. The overall investment portfolio could well consist of holdings of the same securities both directly through individual funds or separately managed accounts, and indirectly through an investment in a fund of funds. These need to be identified and aggregated appropriately.
Additionally, there is no single, consistent data format across GPs for obtaining this information. Data often arrives in unstructured (non-machine-readable) formats, while other GPs and fund administrators provide structured outputs dictated by the legacy systems they use. The timeliness with which this data is provided is also a potential weak link in the reporting chain that needs to be mitigated. This is quite apart from the potential for missing data and other anomalies that need to be accounted for or (at the very least) for which notifications/alerts need to be issued.
Another challenge lies in the depth and breadth of data that needs to be tracked and how this can evolve over time – flexibility needs to be built into whatever approach an investor takes. How easy will it be to add new data points that need to be tracked? Can the data received from GPs be enriched further with relevant and valuable data points from other sources?
Of course, the quality assurance process that wraps around the data aggregation needs to be rigorous – traceability, auditability, and verification are critical to satisfying regulators as well as internal and external stakeholders. Is the process systematic and scalable? Can additional validation steps be added in the future?
Lastly, data needs to be visualized easily to glean true insights. The value here is having a flexible, extensible (ideally pre-built and industry-specific) data model to house the data. This should be aligned with sophisticated data visualizations to provide analytics and reporting that can enhance and inform decision-making. Automation needs to be built-in to reduce the manual reporting burden that takes time away from more investment-focused activities.
At Dynamo, we specialize in helping institutional investors overcome precisely these challenges, making the difference for our clients.
It’s becoming ever clearer that asset managers that provide detailed, accurate look through data and the requisite reporting at scale and within budget are clearly differentiated from those that can’t. These forward-looking firms are positioning themselves to not just retain, but also grow, assets under management in an ever more competitive market. For institutional investors with such capabilities, capital reserves will be better utilized to optimize returns, while also positioning themselves for future regulatory and reporting changes.
CIOs and investment teams will have clarity and depth of insight to aid asset allocation and investment decisions with granular look through data as a critical addition to their armory.
To learn more about how Dynamo can help, schedule a demo.